Brans Brief number 4, year 9, April 2006

In this issue of the Brans Brief:
 

	Implications of the European Directive for the investment policies of Dutch pension funds
	Acceptability test for major shareholders/directors in closer detail
	Seminar on the Dutch Pensions Act

Implications of the European Directive for the investment policies of Dutch pension funds

On 8 February last, the Dutch Pension and Savings Funds Act was amended following the implementation of a European Directive¹ for pension funds. As a result of that Directive, Dutch pension funds must base their investment decisions on the prudent person concept. In addition, pension funds are obliged to adjust the information they supply to their members and beneficiaries by way of a statement on their investment principles. The most important implications for the investment policies of pension funds are addressed below.

Prudent person rule
Dutch pension legislation served as the model for the European Directive implemented. As such, the prudent person rule is very similar to what the Dutch Central Bank calls ‘solid’ investing, under which the investments must meet qualitative standards for safety, quality and distribution of risks. In short, the prudent person rule consists of the following requirements (See Section 9ba(1)(a)-(f) of the Dutch Pension and Savings Funds Act:

1. the assets must be invested in the interests of current and former members and beneficiaries;
2. the assets must be invested in such a manner as to ensure the safety, liquidity and profitability of the portfolio as a whole. Assets held to cover technical provisions must also be invested in a manner that is appropriate to the nature and duration of the expected future retirement benefits;
3. the assets must be predominantly invested on regulated markets;
4. investments in derivates are permitted insofar as they contribute to a reduction of the investment risk or facilitate efficient portfolio management;
5. the assets must be properly diversified;
6. investments in the sponsoring undertaking may be no more than 5% of the portfolio as a whole; when the sponsoring undertaking is part of a group, investment in the undertakings belonging to the group as the sponsoring undertaking may not be more than 10% of the portfolio.

Finally, Section 9ba(4) of the Dutch Pension and Savings Funds Act contains a new requirement:
Pension funds and occupational pension funds may not take out loans or serve as guarantors on behalf of third parties unless the loan is taken out on a temporary basis for liquidity purposes.

The Explanatory Memorandum accompanying the Act also states that, unlike taking out and guaranteeing loans, issuing loans is regarded as constituting a normal activity for pension funds.

Information for members
Each pension funds must prepare a statement concerning its investment principles and incorporate that statement into its Actuarial and Operating Memorandum. The statement must be provided to members and beneficiaries on request. In addition, the statement must be reviewed every three years, as well as after each significant change in the investment policies. The new Directive lists three topics that all statements must include:

1. the investment risk measurement methods;
2. the strategic asset allocation with respect to the nature and duration of the pension liabilities;
3. the risk-management processes implemented.

Since the statement is intended for members and beneficiaries, the pension funds may suffice by providing a concise description of the topics in qualitative terms. The first two topics require pension funds to explain their choices regarding the investment categories included in their portfolios. The strategic allocation may be explained to the members of the pension funds using the results of an Asset Liability Model and/or Risk Budgeting study, in which risks are measured and mapped out based on the characteristics of the nature and duration of the pension liabilities, and placed in the context of modern portfolio theory.

The third topic covers the decision-making procedures of the process of strategic investment decisions and the manner in which account is rendered in connection with those decisions. As such, this topic is closely linked to pension fund governance and the ways in which responsibilities and powers have been delegated.

Conclusion
As a result of the amendments to the Dutch Pension and Savings Funds Act, other rules now apply to investment policies, and the information supplied is subject to other requirements. The Directive states that pension funds must act in accordance with the prudent person rule. This rule adds a new element to what the Dutch Central Bank calls ‘solid’ investing. The rule states that pension funds may not take out or secure loans except temporary loans serving exclusively to improve the liquidity targets.

Finally, as a result of the implementation of the Directive, pension funds must provide more information to their members and beneficiaries. For this purpose, they must prepare statements concerning their investment principles and incorporate those statements in their respective Actuarial and Operating Memorandums. The statement must be kept up-to-date and must address the risks attached to the investment process and the ways in which those risks are controlled.

For more information contact: Rik Brouwer.

Top of page

Acceptability test for major shareholders/directors in closer detail

The current Section 10c of the Dutch Payroll Tax Implementation Decree 1965 states that in situations in which a major shareholder/director builds up some or all of his pension under his own management, the amount of the accruals must correspond to the usual level in collective terms. In other words, the collective schemes determine the trend regarding the question, ‘what constitutes a reasonable pension for a major shareholder/director by societal standards?’

When the Dutch Tax Treatment of Pensions Act was introduced, an assessment framework was incorporated into the clause referred to above for certain minimum elements that the pension schemes of major shareholders/directors must include:

• wages in kind do not constitute pensionable wages;
• the major shareholder/director’s contributions may not exceed the employer’s contributions;
• the deductible under the Dutch General Old Age Pensions Act must be at least 10/7 of the benefits under that Act for unmarried persons;
• survivors’ pensions may only be insured if a potential surviving dependant or orphan can be put forward.

In connection with the introduction of the Dutch Early Retirement, Pre-Pension and Lifecycle Savings Scheme Act and the solutions adopted in practice, it is justified to ask to what extent a common scheme can exist within the meaning of the Implementation Decree. The main concerns here lie in the requirements for the notional benefits under the Dutch General Old Age Pensions Act and the survivors pension. In our view, collective schemes generally only address the two remaining requirements to a very small degree, if at all.

The abolition of the favourable tax treatment for early retirement has resulted in the major pension funds, in particular, seeking compensation in a reduction of the deductible under the Dutch General Old Age Pensions Act (often to the minimum of €11,566 allowed for tax purposes) and the introduction of an accrual-based survivors pension. From the perspective of equal treatment, an accrual-based survivors pension must be awarded to both members with partners and members without partners. Pursuant to the Implementation Decree, major shareholders/directors may only build up a survivors pension if they can present a partner. In short, these are structural changes that can be regarded as the societal standard. As such, we feel that it is important for the Dutch Payroll Tax Implementation Decree 1965 to be updated as soon as possible.

For more information contact: Eric Heemskerk.

Top of page

Seminar on the Dutch Pensions Act

The discussion of the Dutch Pensions Act in the Lower House of Parliament is in full swing. It is at any rate evident that the Pensions act will entail major changes for both pension managers and for employers. As such, it is very important to stay aware of the changes that the Pensions Act will cause. We would like to help you in this regard, and therefore are pleased to invite you to attend one of our seminars on the Dutch Pensions Act.

You can sign up on our website (www.pwactueel.nl), where you will also find information about the times and locations of the seminars. These seminars are free of charge.

Top of page

Questions or Remarks?

If you have any questions or remarks concerning this issue of the BransBrief, please let us know.

Top of page

Contact

Overzicht actuele berichten 

Watson Wyatt Update Nieuwsbrief overzicht 

Bekijk hier uitgaven van de Watson Wyatt Update Nieuwsbrief.

Vragen & Opmerkingen 

Ontvang de nieuwsbrief per e-mail